Study: More than a third of customers unaware of their bank's overdraft coverage

BIRMINGHAM, Alabama -- Bank overdraft fees are under scrutiny again, with a new report saying a large segment of consumers were not aware of steps they could take to avoid the costs associated with bounced checks.

"Overdraft America: Confusion and Concerns about Bank Practices," commissioned by The Pew Center on the States, says that although 18 percent of bank customers incurred an overdraft penalty fee over the past year, their understanding of overdraft rules is weak.

More than one-third of respondents surveyed were not aware that their bank offered overdraft coverage until they incurred a penalty, and many were not aware of the tactics that some banks use that increase costs to consumers, such as reordering deposits and withdrawals, according to the Pew report. Lower-income and younger consumers are hit hardest by bank penalty fees.

Respondents who overdrafted are most concerned about bank practices such as the size of the fee and extended overdraft penalty fees, the additional cost applied for failing to pay overdraft penalties on time. Most consumers said they preferred that their transaction be declined due to insufficient funds as opposed to processed with a subsequent overdraft charge.

About one-third of respondents closed their checking account due to overdraft fees.

"It is important to ensure that checking accounts do not lead to financial distress because of hidden, unexpected, and costly fees like overdrafts," Pew said in the report.

Bill Hardekopf of Birmingham, chief executive of the consumer web site Lowcards.com, said the findings are not surprising. Banks, squeezed by tough federal regulations such as lower debit fees and other new laws enacted by Congress after the 2008 financial crisis, have been trying to find ways to make up for lost income, and overdraft fees remain a significant source of revenue.

In 2011, banks collected $29.5 billion from overdraft fees, according to research firm Moebs Services. That amount is down from $33.1 billion in 2011.

Hardekopf said "overdraft protection" offered by banks is not necessary and that customers should instead let their financial institution know they want to opt out to avoid allowing transactions that would cause checks to bounce.

"Opting out is an easy way for consumers to avoid an expensive fee," he said. "If you don't have enough money in your account and you don't have overdraft protection, then the debit transaction will simply be declined."

Hardekopf said the Consumer Financial Protection Bureau, the agency President Obama created last year to protect consumers, is cracking down on bank fees. In February, the bureau formally announced that it will investigate the overdraft fees that banks charge on checking accounts.

Banks charge a non-sufficient funds fee that is typically between $30 and $35 per transaction, Hardekopf said. In July 2010, the Federal Reserve required banks to receive permission from each checking account customer before the bank provided overdraft protection for ATM and debit card transactions.

Before those new rules, most banks automatically added courtesy overdraft protection to checking accounts with details and fees in the fine print. Some customers didn't realize the high price of the fee until they incurred the charge.

After the rules went into effect, banks continued to aggressively encourage their customers to "opt-in" for overdraft protection and still marketed the benefits of overdraft protection, Hardekopf said.

The CFBP is investigating a number of areas when it comes to overdraft fees. Some banks are still generating overdraft fees by posting transactions from highest to lowest dollar amount, rather than in the order they occurred. This increases the risk of consumers paying overdraft fees on smaller purchases, Hardekopf said.

The agency will look into why low income and young consumers are disproportionately burdened by overdraft fees. According to a 2008 study by the Federal Deposit Insurance Corp., 9 percent of checking accounts incur 84 percent of overdraft fees.

In addition, the CFPB is asking consumers for their input on a "penalty fee box" for bank statements. This will be a disclosure where consumers can see how much overdraft fees will be from their bank.

The judicial system is also tackling the overdraft fee. In February, Chase settled for $110 million a consumer case charging that it routinely reordered checking account transactions. In November 2011, Bank of America reached a $410 million settlement in a class-action lawsuit to compensate debit card customers who were charged excessive overdraft fees between January 2001 and May 2011.

Alternatives

If you feel more comfortable with overdraft protection, most banks offer cheaper alternatives with a link to your savings account, a credit card, or a line of credit that will cover overdrawn transactions, Hardekopf said. There is still a fee each time you overdraw your account since your bank performs a transfer, but it is typically $5 to $15, much less than the standard overdraft fee.

You must contact your bank to set up this alternative service, since it is not part of the opt in selection.

"This is a good time to assess how you monitor your checking account," Hardekopf said. "Set up a low balance alert that will notify you when your account is low. Online banking you can help avoid overdraft situations and help keep up with your account in real time."